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Thursday, November 16, 2006

A Tale of Two IPO's: Hertz Versus KBR

Hertz Global (HTZ) and KBR (KBR) are two very different IPO's, although both come out from under a cloud.

Hertz (HTZ) priced its 88.2+ million share IPO at $15.00 per share, under the $16 to $18 range set by underwriters. This is being sold by the private equity consortium (Clayton, Dubilier & Rice, the Carlyle Group and Merril Lynch Global Private Equity) that bought it from Ford (F) just last year. The problem the street has is not so much with the overall operation of the company, but the structure is a real puker. Most of the proceeds are actually going back to the private equity firms (dividends) and the private equity consortium increased the debt structure since last year's acquisition. Until (assuming IF) this trades lower and has some seasonality behind the deal and gets some of the private equity ownership is sold off and diluted we will not evaluate the company for longer-term investors. This is also not the company's first pony ride so to speak. CNBC's Pisani just said he was surprised that the deal was weak from the floor of the NYSE this morning, but that shows you he isn't reading much ahead of these deals.

KBR (KBR) is FINALLY coming public. This is the engineering and contracting unit that is being spun off out of Halliburton (HAL) and the street has been hoping Halliburton would break this out for a couple of years or more. The pricing came at $17.00, at the top-end of the $15 to $17 range it had stated. This does not come without any fleas. It had to delay its IPO because of regulatary issues over no-bid contracts in the US, recently has had to delay its IPO a day because of demands out of UK regulators, and of course has much of its business operations tied to support contracts in Iraq. The street has perceived that this is actually coming out with an embedded call option of a "cleaner and leaner company" and Halliburton (HAL) shareholders may get the rest of the shares distributed directly to them. That may act as an overhang in the intermediate term, but longer-term investors appear willing to take a shot here with it being priced at a perceived 10% to 20% discount to peers.

Happy IPO'ing today.

Jon C. Ogg
November 16, 2006
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